Inflation is one the greatest threats to the economy. This is evident in public polling, consumer mood, recent earnings reports and statements by government officials.
Around 80% reported Q3 earnings. They cited factors like supply chain problems, difficulty finding labor, rising costs, and other challenges in their conference calls. This is a sharp contrast with the past decade when low demand and deflation were the biggest problems. This environment will require investors to change their strategy and approach in order to make money.
Focusing on stocks with high levels of inflation is one way to make money during this time. Pricing powerAs these companies’ margins will continue expanding, it is likely that they will outperform the rest. Stocks with no pricing power are more likely to underperform, as margin compression degrades EPS. These 3 stocks are worth considering for investors who want to thrive in this inflationary environment. Olin (OLN), Nucor (NUE), Chemours (CC).
Olin (OLN).
OLN produces and markets chemical products in the United States, Europe and worldwide. It operates in three segments: Chloralkali Products and Vinyls, Epoxy, and Winchester. The company markets its products directly to industrial clients, mass merchants retailers wholesalers and other distributors. It also sells directly to the United States Government and prime contractors.
OLN is a great option in an inflationary climate because its chemicals can be used in many industrial processes. This gives it pricing power because its customers cannot refuse higher prices. OLN enjoys a dominant market position in many categories, which is a result of a strong industrial recovery.
Another sign of its strength can be found in its latest earnings report. The highlight of the report was the authorization of a $1B buyback. It also saw a 63% increase in revenue year over year. Net income experienced a major turnaround from a loss last year of $736.8million in Q3 to a profit today of $390.7million.
Analysts expect full-year earnings per share to be $8.64, which would translate into a forward P/E at 5.7. The buyback program, which is accretive at around 12%, should also help to lift EPS.
OLNs POWR RatingsThese promising prospects reflect the company’s optimistic outlook. The company is rated an overall A, which means that it is a Strong Buy according to our proprietary rating system. A-rated stocks have an average annual performance above 30%. Click here to see the complete POWR Ratings of OLN. Here.
Ternium (TX)
TX manufactures, distributes, and sells steel. It is one of the most important steel companies in the globe and has two segmentsSteel or Mining. The Luxembourg-based company also offers engineering, financial, and social services.
Steel companies will also likely outperform in this environment. The key factor is that the growth of infrastructure spending, construction activity and industrial production is all increasing at a rapid pace. These factors are expected to continue for many years. In an inflationary climate, steel companies’ assets can appreciate in value because the cost of producing new production increases. It is also a provider of inputs and has a higher pricing power.
These positives can be seen in TX’s latest earnings report. The company’s profit margins have reached 23%, a significant improvement over its pre-pandemic margin of 5%. The company also reported a 115% revenue increase. It also reported a phenomenal increase in earnings, going from $0.72 per share last year up to $6.12 a share this year.
Additionally, earnings are expected continue to grow but at a slower pace. Despite the earnings growth TX has a forward price/e of 4.2, which is significantly less than the S&P500’s forward P/E at 21. Wall Street is also bullish on this stock with 4 out of 6 analysts covering the stock having a Buy rating and a consensus price target that suggests nearly 40% upside.
The strong fundamentals of Texas are reflected in the company’s POWR Ratings. The stock is rated an overall A, which corresponds to Strong Buy in our proprietary rating systems. The POWR Ratings were calculated by weighing 118 different factors. Each factor is weighted to its optimal degree.
The stock received a B rating for Growth and Value, which is not surprising given its low PE and huge earnings growth. Click to view TX’s complete POWR Ratings. Here.
Chemours (CC)
CC is a manufacturer/distributor of performance chemicals. The company is a spinoff from Dupont and is located in Wilmington, Delaware. It has four major units: Titanium Technologies and Thermal & Specialized Solutions. Advanced Performance Materials and Chemical Solutions are also available.
CC, like OLN will also benefit from an inflationary climate as its chemicals are inputs to all types of products. Titanium dioxide, which is a key ingredient in white paint, is CC’s largest source of revenue. CC is therefore also closely connected to the housing sector.
Housing is one the most important parts of the economy. There is no stopping it thanks to favorable supply/demand dynamics. The supply side is limited with only 300,000 homes available for sale in the entire country. The demand is strong as 30% of Millennials are interested in purchasing a home in the coming years. This is a sharp increase on the 17% who were interested last year. This is partly due in part to the strong labor force, rising wages, low interest rates and strong household balances. These strong fundamentals will likely lead to more home renovation and improvement projects that will benefit CC.
These positive fundamentals were also reflected by CC’s most recent earnings report, which showed a 36% rise in revenue to $1.7billion. The company’s gross profit grew by 66.1% to $427million, while net income soared 181.6% at $214 million. Overall, EPS grew to $1.27 by 176%.
Expect the company’s momentum to continue with projections of $4.11 in full year EPS, more that twice last year. This also means shares are very affordable with a forward price to earnings of 7.6 as well as a dividend yield 2.9%.
CC’s strong fundamentals reflect in its POWR Ratings. The stock received an overall rating of A, which means that it is a Strong Buy according to our POWR Ratings system. The POWR Ratings evaluates stocks using different components to provide investors additional insight. The stock received an A for Quality, which is reasonable considering Wall Street’s consensus price target at $43.29. This implies a 30% upside from current levels. Click HereClick here to view the complete POWR Ratings of CCs.
In premarket trading on Tuesday, OLN shares dropped $0.99 (-2.03%). Year-to date, OLN has fallen -15.26% compared with a -7.39% gain in the benchmark S&P 500 over the same period.
About the Author Jaimini Desai
Jaimini Desai has been working as a reporter and financial writer for over a decade. His goal is for readers to identify the risks and opportunities within the markets. He is the Chief Growth Strategist of StockNews.com as well as the editor for the POWR Stocks under $10 and POWR Stocks Growth newsletters. Find out more about Jaiminis past and links to his most recent articles. More…
